Quora Answer: What Happens When a Startup Takes Venture Capital Funding?

The following is my answer to a Quora question: “What happens when a startup takes venture capital funding?” 

Once you have received venture capital funding, it is an endorsement of your startup.  It makes you more attractive when it comes to further rounds of funding.  But that money comes with strings attached.  Those strings can become iron chains that strangle you.  That is why it is important to look through the term sheet and contract carefully, and plan for the fund deployment before you even take it. 

Large funds sitting in the bank account is an opportunity cost, and not savings,  Funds must circulate for there to be benefit.  You need to plan that fund deployment, and this caters to two areas.  The first is the further development of the product or service to that you are closer to a return on investment.  The second is to plan for further rounds of funding to reach the next developmental milestone, as well as to cater to exits for initial investors to newer investors. 

Depending on the nature of the team, taking in venture capital funding may also come with a seat on the board, or the appointment of a business advisor or mentor.  This is the funder minimising their risk exposure due to board inexperience.  This adds the complication of managing expectations with a party who does not represent the interests of the board, but the investor.  This means managing compliance and legal obligations.  Corporate governance, at this stage, is formalised. 

Once you take in any form of funding, the stakes are raised, and pressure increases.  Investors expect a return on investment, and you are now in a marathon towards some form of exit with a lot of passengers on your back.